Domestic demand underpins growth in orders for British SMEs

The UK’s small and medium-sized (SME) manufacturers saw new orders grow at the fastest pace in two years, but there are stark signs of price pressures gathering steam, according to the latest SME Trends Survey by the Confederation of British Industry (CBI).

The survey of 422 SME manufacturers reported healthy growth in total new orders, underpinned by a strengthening in domestic demand. In contrast, exports rose at only a subdued pace. But firms expect new orders to continue to grow solidly again over the next quarter, with the outlook for both domestic and export demand upbeat.

Output continued to grow modestly, with firms anticipating an acceleration over the short term. Meanwhile, headcount increased at a solid pace in the three months to January, and hiring intentions for the quarter ahead are firm.

Spending plans edging up

Investment intentions for the year ahead showed further signs of stabilisation, following their sharp declines immediately following the EU referendum, with spending plans for both buildings and plant and machinery edging further above their long-run averages.

But pricing pressures are gaining traction, with average unit costs rising at the fastest pace since April 2011, and a further acceleration is expected over the next three months. Both domestic and export output prices were raised sharply, and firms plan on raising them even faster over the coming quarter: expectations for domestic price inflation were the highest since 1995, and for export price inflation they were at a series high (since October 1988). Nonetheless, a record low proportion of respondents cited prices as being likely to limit export orders in the next three months.

“Lower pound is clearly stoking cost pressures”

CBI Principal Economist Alpesh Paleja commented: “Activity among SME manufacturers is ticking along nicely, with new orders growth reaching a two-year high. The pick-up was largely shouldered by domestic demand, with exports yet to see any material boost from the weakness in sterling.

“But the lower pound is clearly stoking cost pressures, which in turn is pushing up factory gate prices. This will eventually feed through to prices at the till, so further rises in consumer price inflation are on the cards.

“Against this backdrop, smaller manufacturers will welcome the Government’s Industrial Strategy green paper, which recognises the importance of driving productivity growth across all sectors of the UK.”

Key findings from the survey

  • 29% of SME manufacturers said they were more optimistic, while 14% said they were less optimistic, giving a rounded balance of +16%.
  • 29% said their volume of output was up and 20% said it was down, giving a balance of +9%. Companies expect output to rise at a quicker pace in the next quarter (+17%).
  • 32% said their domestic orders were up, while 20% said they were down, giving a balance of +12%. Firms expect broadly similar domestic orders growth over the next quarter (+13%).
  • 23% said export orders rose over the past three months and 19% said they fell, leaving a balance of +4%. Firms expect that export orders will strengthen over the next three months (+15%).
  • The proportion of SME manufacturers citing prices as a limitation to export orders in the next three months (28%) was at a record low (since October 1988).
  • Average unit costs (+37%) rose at their fastest pace since April 2011, with the expectation that they will pick up further in the next three months (+46%).
  • Domestic output prices increased (+14%). Firms expect a further acceleration in factory gate price inflation (+35%). The expected balance at its highest since January 1995 (+35%).
  • Export prices (+23%) similarly rose at an accelerated pace, with expectations for the coming quarter (+44%) climbing to the highest since the series began in October 1988.
  • 21% of SME manufacturers are employing more people than three months ago and 11% are employing fewer, leaving a balance of +10%.
  • Plans for capital spending on plant and machinery (0%) and buildings (-5%) in the year ahead edged higher above their long-run averages (-7% and -17% respectively).

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